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MFC Industrial Ltd. (NYSE:MIL)

Q4 2013 Earnings Conference Call

March 31, 2014, 10:00 AM EDT

Executives

Kevin McGrath – Managing Partner at Cameron Associates

Michael J. Smith – President and Chief Executive Officer

James M. Carter – Chief Financial Officer

Rene Randall – Head of Corporate Communications

Analysts

Sven B. Karlen – Wells Fargo Advisors LLC

Jeff R. Geygan – Milwaukee Private Wealth Management, Inc.

Joe Pratt – Wells Fargo Advisors LLC

Operator

Good day, ladies and gentlemen, and welcome to the MFC Industrial Ltd 2013 Year End Conference Call. My name is Ken, and I will be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Kevin McGrath of Cameron Associates. Please proceed.

Kevin McGrath

Thank you, and good morning. We appreciate your interest in joining us in MFC's conference call and webcast to discuss financial results for the 12-month period ended December 30, 2013. On the call with me today are Michael Smith, Chairman and CEO; James Carter, Chief Financial Officer and Rene Randall, Vice President.

The company will make a brief presentation on the results announced this morning and then open the call to questions. Today's call is being webcast on our website at mfcindustrial.com. Simply click on the tab in the website section to access the webcast. The webcast will be posted at mfcindustrial.com for replay approximately two hours following the end of this call. The replay will stay on the site for on-demand review for the next seven days.

Certain statements in the conference call will be forward-looking statements, which reflects management's expectations regarding future growth, results of operations, performance and business prospects and opportunities. For detailed information about risks and uncertainties that could cause our actual results to differ materially from those expressed or implied, please refer to the disclaimer for forward-looking information contained in today's press release on file with the Canadian securities regulators and on our Form 6-K with the SEC.

I would now like turn the call over to Michael to begin the conference.

Michael J. Smith

Thank you very much. Ladies and gentlemen I appreciate you listening to our call this morning. And let me first summarize to you is that we had a great growth year in revenues, but a very disappointing year in bottom line profit. Our industry is a top line industry and I think the money that we have spent to obtain that is fine, but we now have to seriously get our margins higher, our GA cost is quite high; our SG&A for the year was $63 million versus $47 million the prior year. And the fourth quarter results were a loss, which predominantly a non-cash loss.

But I would like to think its appropriate maybe Jim Carter to review that loss and give you some explanation as why the loss occurred. Jim.

James M. Carter

Yes, thank you Michael. Essentially we realized an overall total net income per of $9.7 million, but unfortunately as Michael mentioned this was marred by a loss of approximately $12.6 million realized in the fourth quarter. Again, it should be noted that the adjustments leading to that loss , which were recorded in Q4 were of a non-cash nature and they are generally of a one-off type.

They were the result of comprehensive reviews that we target out on different areas of our recent acquisition of MFC Energy which in area such as asset reclamation obligations, differed taxes, et cetera and these arose mainly from accounting methodology application. The corrections are summarized in total on the impairment and an impairment charge of $6.1 million, depreciation and depletion adjustments of $4.2 million and an adjustment to our differed tax assets of $4.9 million. So the grand total of these adjustments right in the quarter was $15.2 million.

However, there were a number of positive items during the year as well; the company had realized EBITDA of $65 million in 2013 compared to $45 million in 2012; at year end we had working capital of $396 million, which was an increase of $60 million over the prior year. Our working capital ratio at December 31, 2013 was approximately $2.3 million and our equity per share was $11.18. Our long-term debt-to-equity ratio at that time was 0.27 and as well I would like to point out that at December 31, we had cash and cash equivalence of $334 million and credit facilities available to us aggregating $512 million.

There are – there as well of some other items that should be taken into consideration when we talk about our results for the year. During 2013, we were severely impacted by the catastrophic flooding that took place in Alberta in July, which was the worst in the problems of history, as previously reported. One of our sour gas pipelines feeding in Mazeppa Gas Processing Plant was damaged and exposed and then this resulted in shutting down the plant in mid-July which lasted until September 26.

The result of that loss to revenues in excess of $5 million plus approximately $2 million in cost to replace the pipeline. We are in the process of finalizing our claim in this regard, but because of the uncertainty surrounding what this final settlement amount might be with our insurance companies, we have not reflected any provision for this in our financial statements, but it did have a severe impact on our revenues.

As well as Michael mentioned during 2013, our G&A costs increased overall as a result of the integration of our 2012 acquisitions, as well as the expenses incurred in hiring addition staff to develop new markets and customer and supplier relationships, little of any benefits from these initiatives were enjoyed in 2013, but they will be realized in future years. As well we incurred significant professional fees related to both new acquisitions and other corporate matters.

I would like to give you a brief update on natural gas as well, during 2013 MFC Energy which is formally Compton Petroleum produced 17.5 million cubic feet of natural gas and related by products, which converted 345,000 barrel of oil equivalence, and this is outlined in our press release and as shown the average price realized from our natural gas sales was 346 per Mcf and a net back per Boe was 10.16. Might also point in that regard that MFC Enegry’s cash flow break even natural gas price for the year was $1.90, on the full accounting basis which is inclusive of depletion and other non-cash costs the operating break-even price was $3.81 in Mcf.

So that’s sort of the highlights that I have and would be happy to answer any questions for you.

Michael J. Smith

So Jim before we got to the question, let me just continue to review, I think there is a couple of more items in the energy side, we should talk together about. Let me go forward now and just bring you up-to-date on some of the present projects which we’re involved with and also some new projects and give you a flavor of where we’re going.

One of the assets which we have always been a long-term asset, is a royalty from the Wabush in Newfoundland, the Wabush mine has been just recently being put on idle by the operator Cleveland-Cliffs and Cliffs Resources. We do anticipate some pain from them put again on idle, but we are working now to make it a long-term gain. Ours and other stakeholders are quite interested in the property, but we have strong contractual rights to the property and are discussing it with Cliffs and others.

We have not taken an impairment on their property. We are receiving or we will be receiving if it doesn’t default, 3.25 minimum royalty per year and otherwise we get to take the property. So I would say, if I was analyzing it from your perspective, it’s a work in progress and we’ll be looking hard at it and the potential gains we see to be substantial in the future if we can achieve the rationalization of the asset. So that's Wabush, one of the nice things we’ve done this year, we have entered into a participation agreement to drill some wells in Canada with a very, very good operator, high quality operator and they are doing that now and the economic terms of it to us are very, very good. They pay all the costs and we get the right to look back, when we say look back.

Half they had drilled the well, brought it to an economic condition, we can look back and see if we want to invest in it and investing in it really means that we would then buy at cost 30% of the well and be an owner for actually 25% of the cost, or we could just say no I don’t wish to do that and they will pay us a 10% royalty of all the products which is generated from that particular well.

That's quite interesting and quite exciting and we look forward as that develops out more this year. But one of the extra things that they have agreed to and they will be doing all the natural gas that they produce they will sell to our plants. We have a gas processing plant in the area and of course this will be sold to us at commercial rates, this certainly will help the higher volume and make the plant more profitable.

Our energy business is being developed further, I don’t really have a lot to say because we’re in the middle of negotiations on contracts, what I can’t say to you is that the gas to electricity is completely underway, so that is working out, but we haven’t finished tying up all the corners of deep-cut and fractionation plant which we would like to do, but hopefully we will in the clearing [ph] future.

On the commodity side, all of the commodity companies are now fully integrated which is a strong positive from our point of view, and we are starting to see benefits, people working together, products being sold, financings becoming more efficient. So that's one of the reasons why I think we can see some bottom line benefits as well as the top line growth ,but one of the most important things has happened, which we were working on last year which is being brought to ahead this year, is the acquisition of two companies, one called Elsner.

Elsner is a very similar business to ours located in Austria and that company has been purchased and the first phase of integration has occurred and we are very pleased. We know their people and we know their products and these products can be sold not just by the Elsner people, but also our people in Mexico, our people in Argentina and in America, so this integration of value there. Elsner was a company that was owned by an institution and it was really not the last five or six years, it was not viewed as a business, it was more viewed as a risk and the institution was a financial institution and nothing against a financial institution, but just think they didn’t have time to spend to develop it and now we come in there and we can provide them with risk management and the credit which they need and we’ve already seen that in the short period that that would certainly benefit us for this entire year.

And it goes back to this top line and bottom line where we have got to increase our sales and get them to the area of a $1.6 billion and $1.7 billion and then we feel that we are starting to get the critical mass we need. The other project is a project called FESIL, which we actually are close as we speak, there is a money that you were paid by an hour ago and so I’m very pleased with that, so FESIL people had now joined the MFC family and that project is underway and conditions have all been met and as I say the money has been paid which is the most important.

With this we are paying out $82 million, it was important, when we did that we analyzed how we can get that $82 million into long-term debt, so we are now applying to have a long-term credit facility for the same amount of money, so we’re always very conscious now of our ratios and we’ll be doing that we’ll finance this acquisition through that through long-term debt new long-term debts.

The credit facilities for both Elsner and FESIL we have, but we will be looking to reduce their balance sheet, which of course reduces our balance sheet by taking some of their assets and selling them off on a factoring line. We want to make our balance sheet not – grow substantially here and I think we have a plan to do that which is important.

Let me touch on a little bit of the FESIL’s management, we’re very impressed and pleased with those people and we feel that they can help and compliment our other people and we are looking very positively to se all these people becoming MFC people and seeing that integration occurring, certainly there is a synergy on products, certainly the synergy on risks, certainly our financing and I think the certainty – synergy also on putting their people and our people together in touring on each other’s strength and eliminating the weakness.

One of the biggest parts of this Elsner and FESIL and our operations is China, so important [ph] that China operations becomes strong and by putting these different hooks together we have a broader base in China, so we can source products at a more reasonable price, the sort of quality control and see that China becomes a strong benefit, if its the benefit in China besides buying correctly its the logistics and the money we save in shipping and that is a major part and I think we now can see good strength, with the integration of those three operations in the China market.

I think when you come back and see – I guess they all produce which to say 125 million a year of ferrosilicon and they do that in Norway and they do it close to the Arctic Circle in a place called Rada [ph]. The product is completely sold and it is basically a high quality commodity, prices have gone up a little bit, a year though the price was €1075 per tonne, end of last year it was $1120 a tonne and now it’s up to $1150. So we would like it to go higher of course and but I think we are quite happy and we look forward to having good profits from that plant and good product for our sales people to sell around the world globally.

Before we go to questions and answers, I just would like to say two things, one we have changed corporate governance internally and I think we have done some good things, one of those good things is that we have taken away the poison pill from the shareholders right and canceled that and we wanted to cancel it, number one we think it really doesn’t help, we want to be a public company, we don’t want to be a private company, we want freedom for shareholders to buy and sell their share.

We’ve also asking our shareholders to vote and our vote has passed, resolutions were we’ve taken away what we call the staggered Board approach where shareholders elect Board members on a three year rotation term. In some countries that is acceptable, but we feel if we are going to now progress and be proud and go forward as a public company, our shareholder should elect that directors on an annual basis and I think these are two very, very important rules. In addition, we have elected to Peter Kellogg to the Chairman of the Board, and Peter to us is a very good sign, Peter owns 33% of the stock and his people have helped us in many ways and we respect that and look forward to working with him in the future.

And lastly, I just want to say the most important thing we have done with these acquisitions and with the company, we have not gone outside of our balance sheet or hurt our ratios. The most important thing is maintaining the integrity of our balance sheet and our financial ratios and at the same time, with these acquisitions we have not diluted our shareholders by issuing any shares. we have borrowed money, use our own capital on hand and we have borrowed money for long-term for long-term assets, and have not quitted any dilution. So I think that’s the main key of where we’re going and what should always be for the future.

I have no more opening statement and we would very much welcome the questions from everybody.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sven Karlen from Wells Fargo. Please proceed.

Sven B. Karlen – Wells Fargo Advisors LLC

Good morning, Michael, it's Sven, how are you?

Michael J. Smith

Good morning. Very well, thanks.

Sven B. Karlen – Wells Fargo Advisors LLC

Could you give us some idea of the cost of the debt that you have put on to buy FESIL and Elsner?

Michael J. Smith

We have not finished that costing, but we believe that costing will be in the area of 2.55%.

Sven B. Karlen – Wells Fargo Advisors LLC

Okay. Thank you.

Michael J. Smith

The tenure will be about seven years I would assume.

Sven B. Karlen – Wells Fargo Advisors LLC

Seven years, okay. Thank you.

Operator

The next question comes from the line of Jeff Geygan from Milwaukee Private Wealth Management. Please proceed.

Jeff R. Geygan – Milwaukee Private Wealth Management, Inc.

Good morning, Michael. Can you please update us on Pea Ridge?

Michael J. Smith

It’s still proceeding and I didn’t really address it today, because I have nothing more new to tell you, except that we have no negative, I guess I could say that and we’re proceeding with the studies and its going along.

Jeff R. Geygan – Milwaukee Private Wealth Management, Inc.

All right and as a follow-up, you didn’t mention anything about changes at the executive level; will there be such changes with your executive personnel?

Michael J. Smith

I think there is going to be a lot of changes overall at MFC. We are lucky here, we’ve got some new – with these new acquisitions we’ve got some good senior management. This senior management were not entrepreneurially led, they were executives. So I always buy them when we acquire companies over the years, the ones who are entrepreneurs they never survive and you should probably let them go or have an agreement to let them go at the beginning. With FESIL and Elsner, we had senior executives and I see them to be a great complement for us and from my position, we are still looking to fill the CEO role and I’m hoping we can do that in the near future.

Jeff R. Geygan – Milwaukee Private Wealth Management, Inc.

All right. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Joe Pratt from WFC Asset Management. Please proceed.

Joe Pratt – Wells Fargo Advisors LLC

Hi good morning Michael.

Michael J. Smith

Good morning Joe.

Joe Pratt – Wells Fargo Advisors LLC

Just in terms of the hedging, does this mean you are going to realize 4.39 in 2014 for your gas on an average compared to 3.46 in 2013.

Michael J. Smith

Joe what happens in reality is that we either make it on the hedge or we make it on the industrial side on the production. So what is really nice here with 19 million – I have got a 19 million guarantee at 4.39, Jim says – what does that cost Jim, just [inaudible] $1.70...

James M. Carter

Right now?

Michael J. Smith

Yes.

James M. Carter

Our cash cost per Mcf is – for 2013 – based on 2013 figures is 1.90 and our full cost inclusive of depletion, other non-cash costs whatever was 3.81.

Michael J. Smith

So let’s just talk cash-to-cash, so I got $1.90 versus $4.39. I’m quite comfortable on natural gas. I wish I had a little bit more on the short side, but you didn’t want to chase it right and you want to get it so you’ll have a liquid position if you want to cover.

James M. Carter

So that's here too, that’s CAD $4.90.

Michael J. Smith

That’s right, we are talking – when I talk $4.39 I’m talking U.S. and as Jim is saying his lifting costs or his actual cash cost to get the gas out is Canadian.

Joe Pratt – Wells Fargo Advisors LLC

Well, I guess I’m just doing a rough pencil thing, where if I look at 50 million cubic feet a day times or spread at $2x 365 days, I come up with what I recall manufacturing operating cash or manufacturing cash flow of say $35 million and in order to calculate on EBITDA I just don’t know what your overheads are. I’m trying to come up with an EBITDA in 2014 for Compton.

Michael J. Smith

Do you want to get back to Joe on that?

James M. Carter

Yes, I think again, we would have to go look at our forecast on that and there are other factors that come in.

Joe Pratt – Wells Fargo Advisors LLC

Okay. Well I can imagine you spend more than say $5 million on interest and $5 million on overheads, so that gets me down to an EBITDA north of $20 million, that’s just – I got – for the outside analysts using your SEC filings, I don’t believe there’s anyway to compute the EBITDA number for Compton in 2012, 2013 or projecting on for 2014?

Michael J. Smith

I think one thing for sure Joe that the G&A at the Energy Group will certainly be more than $5 million.

Joe Pratt – Wells Fargo Advisors LLC

Okay.

Michael J. Smith

I mean substantially more than that.

Joe Pratt – Wells Fargo Advisors LLC

Okay.

James M. Carter

But when they will be…

Rene Randall

Then they have royalties, royalties and everything else.

James M. Carter

Yes.

Michael J. Smith

And there’s no interest costs, Joe though .

Joe Pratt – Wells Fargo Advisors LLC

Okay, got it. And then the second thing would be, do you want to comment on your commodity revenue, in 2013 it was about $700 million, how do you get it going to $1.06 billion or $1.07 billion?

Michael J. Smith

With the two acquisitions, the turnover of FESIL and Elsner should be $700 million, $800 million without any growth.

Rene Randall

The growth is not coming just from energy Joe, it’s coming from the acquisitions as well.

James M. Carter

And it’s just a part of it.

Joe Pratt – Wells Fargo Advisors LLC

Okay. Thank you very much.

James M. Carter

All right.

Rene Randall

You’re welcome.

Joe Pratt – Wells Fargo Advisors LLC

Yes.

Operator

(Operator Instructions) Okay. This concludes our question-and-answer session; I will now turn the conference back over to Michael Smith.

Michael J. Smith

We seriously thank you very much for listening this morning and we encourage you to call with any other questions you have, call Rene Randall or ourselves and we would be more happy to respond in a quick way and we thank you.

Operator

This concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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